The Quick Read: It depends on appraised value, not on the unit’s existence: the new loan is capped at 75% of appraised value on a standard investment-property cash-out, and your cash is that loan minus your payoff, closing costs, and any required escrows. An accessory dwelling unit (ADU) raises the cash only if it is legal and the appraisal supports a higher value. It also helps when its rent is documented and counted toward coverage.
- The ceiling is typically 75% of appraised value on an investment-property cash-out. The ceiling is 70% when the collateral is a short-term rental.
- Cash out = appraised value × the leverage cap, minus the payoff, minus closing costs and escrows.
- A permitted, leased ADU can lift value and coverage. It never lifts the leverage cap itself.
- An unpermitted or unleased ADU usually adds little or nothing to value or to rent used for lender review.
- Seasoning of about 6 months, credit, and reserves can limit proceeds no matter how strong the unit is.
How Does the Cash-Out Formula Work?
Cash out equals the new loan minus everything the new loan has to pay off or cover. Across the wholesale network Lendmire works with, cash-out refinances on investment property top out around 75% of appraised value. A standard rental fits that cap. Short-term-rental collateral typically sits lower, around 70%.
DSCR Cash-Out Calculator
Run the cash-out numbers in your market
Rate source: Freddie Mac 30-yr average via FRED® — Federal Reserve Bank of St. Louis · effective Nov 5, 2026
Prefilled with starting assumptions — enter your property’s value, balance, taxes, and insurance for a more accurate picture.
Program parameters update from Lendmire’s centralized guideline source. Taxes and insurance are editable estimates.
As of Nov 5, 2026 · General Freddie Mac market benchmark, not a Lendmire loan offer. Property value, balance, taxes, and insurance are editable estimates. Maximum loan-to-value varies by lender, program, property type, and seasoning. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
Here is the formula, step by step:
1. Take the appraised value.
2. Multiply by the leverage cap (typically 75% on a standard investment-property cash-out).
3. Subtract the payoff on your existing loan, including any prepayment penalty on it.
4. Subtract closing costs, prepaids, and any required escrows.
5. What remains is your cash to borrower.
Equity is not cash. A property can carry plenty of equity on paper and still return little at closing, because the leverage cap, the payoff, and the costs all come off first. When the payoff and costs consume the entire capped loan, the refinance returns nothing and becomes a payoff-only result.
DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage. The file qualifies primarily on property-level rental income covering the payment, subject to lender guidelines. For the broader picture, Lendmire’s complete DSCR loans guide covers the product end to end.
Key Terms Defined
DSCR (debt service coverage ratio): monthly rent used for lender review divided by the monthly payment. Many select programs start at 1.00. A separate select-lender path goes below 1.00, with leverage and terms adjusted.
PITIA: principal, interest, taxes, insurance, and any association dues. It is the payment figure that rent is measured against.
LTV (loan-to-value): the loan amount as a percentage of the appraised value.
ADU (accessory dwelling unit): a second, smaller living unit on the same parcel, such as a garage conversion, a basement apartment, or a backyard cottage.
Seasoning: the waiting period after you take title before a lender will lend at the top cash-out leverage. About 6 months is the common expectation.
Payoff-only refinance: a refinance where the new loan only covers the old balance and costs, so no cash comes back.
Does the ADU Raise the Value, the Rent, or Both?
An ADU can help on two separate tests, and neither is automatic. The value test sets how large the loan can be. The rent test sets whether that loan’s payment is covered.
The value side. A legal, permitted ADU may support a higher appraised value, depending on comparable sales and underwriter review. The appraiser looks for similar properties that sold with a unit like yours. If no comps exist, the appraiser may give the unit little credit. Do not plan around a fixed percentage lift. None is reliable.
The rent side. Legal ADU rent can raise coverage. That may unlock stronger pricing and leverage tiers on the programs that scale by ratio. It does not raise the 75% cap. Every point of extra value adds three-quarters of a point of loan, and nothing more.
The rent figure that counts is usually the lower of the signed lease or the appraiser’s market-rent estimate, depending on the program. Most programs in the network want rent that is documented, so a lease or a rent schedule matters.
Property classification matters too. A main house plus an ADU can be treated as a one-unit property with extra rent, or as a multi-unit property. The appraisal form changes with that call. According to McKissock, an appraiser-education provider, the multi-unit income form covers duplexes through fourplexes. Its single-family rent schedule documents monthly long-term rent only.
How Each ADU Status Changes Your Cash
An ADU that is permitted and leased helps the most. An unpermitted or planned unit helps the least. Here is how the main situations tend to play out.
| ADU status | Effect on value | Effect on rent used for lender review |
|---|---|---|
| Permitted, leased | May support higher value with good comps | Lease or market rent can count |
| Permitted, vacant | May support higher value | Market-rent estimate may count, program-dependent |
| Unpermitted | Typically little or nothing | Typically excluded |
| Planned or under construction | Not yet appraisable as a unit | Projected rent generally does not count |
| Short-term rental | Same value logic, lower leverage | Needs hosting history |
Treat the right-hand column as a pattern, not a promise. Each program decides what rent it will accept.
The legality point is worth a quick agency contrast. Freddie Mac’s ADU fact sheet says an ADU must be legal, legal non-conforming, or in an area with no zoning, and it treats an illegal ADU as ineligible for qualifying income. DSCR is not an agency product. Still, the instinct is the same across lending: an unpermitted unit rarely earns credit.
A Worked Example in Percentages
Run the numbers on one rental with a modeled payoff. These are modeled assumptions, not market data. They are expressed as shares of appraised value so the math stays clean.
- Appraised value: 100 points.
- Leverage cap: 75% on a standard investment-property cash-out, so the maximum new loan is 75 points.
- Existing payoff: 50 points (modeled).
- Closing costs and escrows: 2 points (modeled).
- Cash to borrower: 75 minus 50 minus 2, or 23 points.
The ADU enters in two places. If comps support a higher appraised value, every added point of value raises the maximum loan by 0.75 points and raises cash by the same amount. That is the whole mechanical effect.
The rent test works differently, as the next table shows. In this model the new loan is larger than the old one, so the payment rises and coverage gets thinner.
| Modeled coverage on the new loan | Without ADU rent | With ADU rent counted |
|---|---|---|
| DSCR | Just under 1.00x | Around 1.15x |
| What it means | Loan may need to shrink, or a select-lender sub-1.00 path with adjusted leverage and terms | Clears 1.00, where many select programs start |
Here is the practical takeaway. When the main house alone falls short on coverage, the ADU’s rent can be the difference between a full-size loan and a smaller one. On those files, more documented ADU rent can mean more cash.
One caution. Clearing 1.00 is not the same as positive cash flow. DSCR compares rent to PITIA only. Repairs, vacancy, management, utilities, and capital expenses sit outside the ratio, so a file can pass the test and still run tight.
What Else Caps the Cash?
Even a strong ADU cannot override the program rules. Four limits do most of the capping.
Seasoning. Most programs want about 6 months of ownership, measured from title recording, before they will lend at the top cash-out leverage. A recently purchased property may qualify only for a lower amount.
Credit. A 620 floor exists in parts of the network. Most programs want around 660. A score of 700 or higher opens the strongest leverage tiers.
Reserves. These are liquid funds you keep after closing. They vary by lender, leverage, loan size, and transaction type. About 6 months of PITIA is common, and loans above $1,500,000 typically step up to about 9 months.
Loan size. Standard programs run up to $3,000,000. Above $2,500,000, the network generally holds to 30-year fixed structures. A rate-and-term refinance returns no cash at closing. Once cash comes back, the 75% cash-out cap applies.
Property type matters too. Manufactured homes, log homes, and barndominiums are not offered in these DSCR programs, so an ADU built in one of those styles does not change that.
A larger down payment on a purchase can lower the payment and lift coverage. A cash-out refinance has no such lever. Equity helps with leverage, but it never erases credit floors, reserve rules, or property eligibility. The strongest files clear both tests: enough equity and enough rental coverage.
Consider a file where the payoff and the rent test both look fine, yet the appraisal assigns the unit little value. In that case the loan cap does the damage. Order matters. Confirm permits and the lease before the appraisal, not after.
DSCR vs. conventional financing
There are two common ways to finance an investment property, and they qualify you differently — here’s how investors weigh them.
Why investors choose it
- Qualifies on the property’s rental income — no personal tax returns, W-2s, or pay stubs needed to document income.
- No personal debt-to-income ceiling to clear, so existing mortgages and obligations don’t cap your borrowing the same way.
- Can be closed in an LLC, keeping the property inside a business entity.
- Built for scaling — not held to the limit on number of financed properties that conventional financing applies.
- Underwriting centers on the deal: generally qualifies when the rent covers the payment, a 1.00x coverage ratio being a common baseline (confirmed in underwriting).
- Designed specifically for investment property, including long-term and, where the program allows, short-term rentals.
Where it’s strong
- Often the lowest ongoing financing cost for a buyer who fully qualifies on personal income — a fit for a first property or a cost-first purchase.
Trade-offs for investors
- Requires full personal income documentation and must fit within a debt-to-income limit — salary, existing debts, and other mortgages all count.
- Typically held in your personal name rather than a business entity.
- Caps how many financed properties you can carry, which can become a ceiling as a portfolio grows.
- Evaluates you as a borrower as much as the property, which usually means more paperwork.
How investors usually choose: a first or single property often optimizes for the lowest financing cost; portfolio builders often optimize for leverage, vesting in an LLC, and scaling past conventional caps. The right answer depends on your goals, the property, and current guidelines — both paths run through select lenders in Lendmire’s wholesale network, with eligibility and terms confirmed in underwriting.
Short-Term-Rental ADUs Get Less Leverage
If you plan to rent the ADU nightly, expect tighter terms. Short-term-rental cash-out typically runs around 70% LTV, against 75% on a standard rental. Programs generally look for a 640 or higher score and about 12 months of hosting history. On the refinance, the property must still meet a minimum DSCR of 1.00, meaning qualifying rent at least equal to PITIA.
The appraisal rent schedule documents long-term rent, not nightly rent. Short-term income is usually supported by platform history instead. Short-term rental rules can vary by city, county, HOA, and property type, so investors should confirm local rules before relying on projected rental income.
What If the Appraisal or the Rent Falls Short?
A low appraisal shrinks the loan first and often shrinks your cash to zero. Run both versions before you apply: one with the ADU credited and one without.
Here are the common failure points, in order of how often investors miss them:
- The appraiser does not credit the ADU because there are no comparable sales with one.
- The lease is below the market-rent estimate, so the lower number is used.
- The ADU is unpermitted, so its rent and value are excluded.
- The ADU is newly built and has no lease history.
- The new, larger payment drags coverage under the program’s floor.
When coverage is the problem, your options are usually to take a smaller loan, wait for a lease to season, or ask about a select-lender sub-1.00 path, where leverage and terms adjust. When value is the problem, you can wait for stronger comps or document the permits better. If the unit is not built yet, funding the build comes first. Lendmire’s piece VA Cash-Out Refinance Requirements to Build an Accessory Dwelling Unit walks through that stage for owner-occupants.
Fees also matter. Closing costs can eat a large share of a small cash-out, so a modest refinance may not be worth doing. And if you use the proceeds to build or improve another unit, tax treatment varies; consult a qualified professional.
Why Investors Use DSCR Instead of an Owner-Occupied Cash-Out
Owner-occupied cash-out rules treat ADU rent cautiously, and that is a big reason investors move to DSCR. HUD’s mortgagee letter says ADU rent cannot count as effective income to qualify a cash-out refinance on a one-unit FHA property with an ADU. Freddie Mac’s fact sheet points to the subject ADU’s rent applying to no-cash-out refinances.
Those are agency and FHA rules. They do not govern DSCR loans, and they are only a contrast. DSCR loans are for investment properties, not primary residences, so the owner-occupied rules do not apply.
If you live in the home and want to compare conventional and VA routes on an ADU property, see Lendmire’s piece VA Cash-Out Refinance vs. Conventional Cash-Out on Property With Accessory Dwelling Unit. Once the property is a pure rental, the DSCR path usually fits better.
Pre-Application Checklist
Gather these before you ask for a quote:
- Permit, final inspection, or certificate of occupancy for the ADU.
- Signed lease for the main house and for the ADU.
- Current payoff statement and note any prepayment penalty.
- Insurance reflecting both units and their use.
- Entity documents, if the property is vested in an LLC, subject to lender program eligibility.
- Proof of title recording date for the seasoning check.
- Evidence of reserves in liquid accounts.
Frequently Asked Questions
Does an ADU increase the cash I can pull out?
Only through value and rent. A legal, permitted ADU may support a higher appraised value, depending on comps and underwriter review, and each added point of value lifts the loan cap by 0.75 points at a 75% ceiling. Counted rent can also improve coverage, which helps when the payment is the constraint. The cap itself does not change.
Will the lender count my ADU’s projected rent?
Generally no. Projected rent for an unbuilt or unleased unit usually does not count. A lease or an appraiser’s market-rent estimate for a legal, completed unit is what most programs use, often the lower of the two. Terms differ by program.
Can I use a DSCR cash-out on a home I live in?
No. DSCR loans are business-purpose loans for non-owner-occupied investment property. If you live in one of the units, you are looking at an owner-occupied loan. The exception is a multi-unit property where occupancy conditions are satisfied under a different program.
What if the ADU is unpermitted?
Expect it to be excluded from both value and rent used for program review. Some owners legalize the unit first, then refinance once permits and a lease are in place. Ask about eligibility before you appraise.
Does a short-term-rental ADU change my leverage?
Yes. Short-term-rental cash-out typically runs near 70%, compared with 75% on a standard rental. Expect a 640 or higher score and about 12 months of hosting history. The long-term rent schedule does not document nightly income.
Next Step
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. Lendmire is a broker arranging financing through select lenders in its wholesale network, covering 41 markets, including Washington, D.C. Program terms vary by borrower, property, and lender. This is not a commitment to lend. You can reach the team at 828-256-2183.
An ADU earns its place in the cash-out math the same way any improvement does: through paperwork, comps, and a signed lease.
For how equity extraction works on an investment property, see Lendmire’s guide to cash-out refinance on an investment property.
About Lendmire
Lendmire — NMLS# 2371349 — is a DSCR and non-QM mortgage brokerage with investor loan programs in 41 markets, including Washington, D.C. DSCR eligibility is commonly reviewed by the lender around property-level rent rather than personal income documentation, subject to lender guidelines, and the brokerage helps arrange financing for LLC-owned portfolios beyond conventional financed-property limits. Recognized by Scotsman Guide as a Top Mortgage Workplace in 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. McKissock
3. HUD Mortgagee Letter 2023-17
This article is part of Lendmire’s investment property cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Can You Get a DSCR Cash-Out Refinance on a Rental You Already Own? · How Much Can You Borrow With a DSCR Cash-Out Refinance on a Multi-Unit Short-Term Rental? · How Much Can You Borrow With a DSCR Cash-Out Refinance as a Repeat Fix-and-Flip Investor?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.